What does economics have to say about (the emergence of) Mr. Trump?

It might seem like a rather weird topic for a blog called Economics for Everybody to think about, but what explains the rise, and the seemingly inevitable ascent to the Presidency of the USA, of Mr. Trump?

This blog post isn’t about the politics of Mr. Trump, endlessly fascinating a topic though it is. It is instead about an attempt at looking at the economic factors that caused this phenomenon to occur at all.

And one cause is related to this:

Of the jobs lost during the recession, about 60 percent of them were in what are called “mid-wage” occupations. What about the jobs added since the end of the recession? Seventy-three percent of them have been in lower-wage occupations, defined as $13.52 an hour or less.

That is pulled from a book written by Tyler Cowen, called Average is Over. Read the whole book, it is worth the price of admission. But the trend that is highlighted in this book is the trend that is causing the rise and rise of Mr. Trump.

One, there are likely to be fewer jobs for all of us in the future. Two, those jobs that do exist are not going to pay very well at the bottom of the pyramid. One shouldn’t describe a book in two sentences, but that’s the quick summary of Average is Over.

Here’s the thing, though: machines don’t vote. People do. And who do you think those seventy-three percent in the block-quote above are going to vote for? For the guy who promises to cure their problems by – well, by curing their problems.

Mr. Trump’s solutions might not win him an academic degree in economics, but that’s not the race he’s running. The race he’s running is being judged by the people who have mostly lost in this era of globalization, and according to some of them, he’s doing just fine. If this “disenchanted” group turns out to be large enough, and motivated enough, Mr. Trump stands a very real chance of becoming President Trump by year end.

The disenchanted workers of the globalization era is not a new idea, far from it. And there is a lot more to the idea than what has been written here. The reason I’m writing about it now, and the reason I’m highlighting this one factor above all else,  is because old theories are beginning to receive fresh validation,  and that makes it an exciting time to be an analyst.

Being a global citizen right now, on the other hand, might well raise the demand for blood pressure pills.

Why 1978 and 1991 will likely be the most important years of the 20th century

If you had to pick just one year from the 21st century and say that this was the year that mattered the most, which year would you pick? Some might pick 1939 and the start of WWII. Others, for the same reason, might pick 1945, as the year it finally ended. Others more in tune with the long run forces of history might pick 1914 because that’s when the whole thing really started.

 

But that’s answering the question from a European perspective. Closer to home, you might want to pick 1947, and our neighbours to the east might pick 1949 for broadly similar reasons. But as an economist from these parts, my choice would by 1978 from a broader perspective, or 1991 from a purely Indian one.

 

Because 1978 was the year in which Deng Xiaoping famously said “Let some people get rich first” and kickstarted the process of market reform in China. Xiaogang is a village that almost nobody outside of China has heard of, but if you’re interested in the question of how nations get richer over time, you should take the time out and click on that link. There’s a lot else that Chinese economic history has to teach us, but we’ll get to it over time.

 

Let’s move on to the other date that we think is important from the 20th century: 1991.

 

“A moment comes,which comes but rarely in history,when we step out from the old to new,when an age ends,and when the soul of a nation,long suppressed,finds utterance.” Famous words, uttered by a famous politician, and possibly the most famous speech by an Indian politician. We’d argue that these apply in almost equal measure to the year 1991, because that is when the entrepreneurial spirit of India, long suppressed, finally found utterance.

 

It is when business stopped being a bad word in Indian parlance, and getting (and staying!) rich was seen not as a dubious achievement but an everyday event. Indians going to movie houses post 1991 admired the Mercedes that Amir Khan drove to Goa in Dil Chahta Hai, and not the smoudering angst that Amitabh Bachchan harboured against the system in Deewar. Aspirations were a good thing, and it was ok to say that publicly after 1991.

 

The Liberalized Exchange Rate Management System (LERMS), the New Economic Policy (NEP) of 1991  and the other economic policies of that era were remarkable, and are rightly being celebrated today as the cornerstones of the remarkable change that has been wrought in India since. And we’ll talk about the impact that these policies had in the posts to follow.

 

But they are, in a sense, merely the tools that allowed P Chidambaram, Montek Singh Ahluwalia, PV Narasimha Rao and above all, Manmohan Singh to say what Deng Xiaoping had said all those many years ago in China.

 

1991 was about letting Indians get rich.

What You Need to Know About the 7th Pay Commission

The government has recently decided to go ahead with the recommendations of the Seventh Pay Commission. So far, so familiar. But what exactly does it mean for all of us? How many people does it impact, and in what fashion? If you had questions of this sort and didn’t know whom to ask, well, read on!

7th Pay Commission FAQ

 

  1. What is the VIIth Pay Commission?
    It’s a body appointed by the Finance Ministry, under the Department of Expenditure, and this has been happening since independence, at a 10 year interval, give or take a few years.

    This commission has the responsibility of taking a look at the payments, allowances and pensions made to government employees (or to call it by the all too cute name our government chooses to give it, PAP) and figuring out how much of revisions need to happen, and why. It’s also supposed to tell us about whether the recommendations are actually possible or not.
  2. So what are these guys saying this time around?
    That beginning this year, we need to dole out ₹1,02,000,00,00,000 in extra payments, out of which roughly 40% will be an increase in pay, 30% will be an increase in allowances, and the rest will be an increase in pension payouts. (Source)
  3. That sounds like a lot. Do we have that kind of cash lying around?
    Short answer, no.

    To finance the Indian government’s expenditure this year, it was slated to borrow ₹533,904,00,00,000 (source)*. Technically, this includes provisioning for implementing the 7th Pay Commission recommendations, but that’s a lot of borrowing (about 3.5% of our nominal GDP for this year).

    On the other hand, the answer to question 2 is built on an annual appreciation of 3% per year in PAP, and that’s hardly an unfairly large amount. Plus, the report mentions that if India grows at around 7.5% per year, the additional burden on the government won’t be all that much.
  4. By the way, how many people does the Government of India employ in the first place?
    If you define an employee of the Indian government as being a person who holds a civilian position with the GoI, and whose salary is paid out under the Consolidated Fund of India, then there are almost 40,00,000 employees of the Indian government.

    Roughly half of India’s population is of working age, for a rough and ready benchmark.
  5. Will inflation increase in India as a consequence of the 7th Pay Commission being implemented?
    From the point of view of theory, yes, it should. It probably won’t be dramatic or backbreaking, but yes, it will have an impact. How much will be the rise is the million dollar question, but here’s the thing – we’ll never know. You can’t say, “Well, check how much inflation was before, and how much it is after, and attribute the difference to the 7th Pay Commission”. And the reason you can’t say that is because too many other things are changing in the economy at the same time. So we’ll never know the actual impact it had on inflation in India, and we must make our peace with that fact.

 

Got other questions? Want more data? Shout out to us in the comments below!

*Update: For reasons we honestly can’t figure out, the INR symbol doesn’t show up the way it should on certain browsers. Our apologies.

 

Why We Shouldn’t Be All That Worried About Rexit

It’s number three on the list now of exits that world can’t stop talking about, behind the two exits that Britain managed from one kind of Euro or the other, but it still is big news here in India: Is Raghuram Rajan leaving the RBI in September the end of civilization as we know it?

 

Short answer: no.

 

Having never met Mr. Rajan, we can’t be sure about this, but we’d bet on he being horrified at the very idea of any single person (including himself) being the sole reason behind an institution’s efficient functioning. The Reserve Bank of India is the apex body when it comes to monetary policy in India, and has been ably served by many individuals in the past and the present, and that is only likely to continue in the future. So no, he leaving the RBI is not the end of civilization as we know it. It’ll be kind of like MS Dhoni leaving the Indian cricket team. Not great news, but not a disaster either.

 

On the other hand (I love counting the number of times we economists use that phrase. You should try it sometime – fun game), that does not mean that Raghuram Rajan leaving the RBI is good news. Especially if there is some truth to the rumour that he had to go because he was not afraid to speak his mind. He, and anybody else, ought to be judged for what they do in their job, and anybody who argues that Mr. Rajan was not good at his job is also likely to think that Grand Masti is good wholesome cinema.

 

On the parameter of doing his job well, Mr. Rajan excelled himself.

Rajan

He was appointed to tame the beast called inflation, and he has managed that in style. This is not the place to go into the details, but whatever steps he took clearly worked. And as he himself mentioned in his statement regarding his decision to not continue as RBI governor, he would have liked to finish working on the agendas he had initiated. From that perspective, he not being around to see the job through is bad news for both the RBI and for India.

 

But it’s not as if we don’t have other people eminently capable of doing the job of being the Governor of the RBI.

 

To go back to the MS Dhoni analogy, sure he can’t be replaced, and it’ll be a sad day when he hangs up his boots. The new keeper (and the new captain) will take a while to kick rear ends as expertly as Dhoni used to, but they have the ability.

 

And that’s our point: it’s bad news, but it ain’t the end of the world.